The German Democratic Republic (GDR, East Germany) was officially created on 7 October 1949 as a direct result of the Cold War. Unable to arrive at a postwar settlement with Great Britain, France, and the United States regarding Germany, the Soviet Union allowed its zone of occupation to become a sovereign state. East Germany's population in 1950 was 18.4 million people.

At the February 1945 Yalta Conference, the Allies had agreed to jointly occupy Germany pending the final resolution of a peace treaty. Germany and Berlin, its capital, were divided into four zones to be administered by the four victorious powers. Although the occupied territories were to be treated as a single economic unit, disputes over the disposition of resources surfaced almost immediately. The future of Germany became an immediate subject of debate, with the Soviet Union pressing for the formation of a communist Germany. The first steps in this direction were taken even before the war ended. Walter Ulbricht, a German communist who had spent the war years in the Soviet Union training for this eventuality, led a group of exiles back to Germany with the Red Army. With Soviet support, they placed sympathizers in key posts in the new, superficially democratic administration of the occupied territory. The communists' record of resisting the Nazis allowed them to outmaneuver other political parties permitted in the Soviet zone. The German Social Democratic Party (SPD), however, remained a challenge. Backed by the Soviet military authorities, Ulbricht engineered the merger of the eastern branches of the SPD with the German Communist Party (KPD) in April 1946. The resulting Socialist Unity Party (SED) was under communist control by 1948.

Even though Soviet military authorities allowed the so-called Bloc Parties (the Christian Democratic Union, the Liberal Democratic Party, the Democratic Farmers' Party, and the National Democratic Party) to operate in their zone, the SED had an effective monopoly on power. The mass organizations that were given a place in the new political system (the Free German Trade Unions, the Free German Youth, the German Women's League, and the Cultural League) were also under the SED's firm control. The German communists, with the aid and support of the Soviets, had thus laid the foundations for a single-party state by the time the disputes between the Western powers and the Soviets came to a head in April 1948, in the form of the Berlin Blockade.

The blockade itself was the result of a series of disagreements over the administration of Berlin as well as over the future development of Germany. Both sides used the process of granting incrementally greater authority to Germans and German institutions as leverage in negotiations. The end result was the 1949 creation of two separate German states, the Federal Republic of Germany (FRG, West Germany) and East Germany.

The Western Allies did not immediately recognize the East German state. The West German state, they contended, was not intended as a permanent solution to the German question. By and large, the Western Allies and the new West German government viewed the division of Germany as the result of deliberate Soviet policy and continued to claim the right to represent all Germans. The Soviets, on the other hand, appeared to consider the question closed. They granted East Germany immediate recognition as a sovereign, constitutional state, whereas West Germany was deemed a self-governing Allied Protectorate.

Despite the appointment of Wilhelm Pieck as East Germany's first president, Ulbricht remained the driving force in the government's development. His policies were slavishly Stalinist. Under the slogan of "constructing socialism," he purged the SED, established the infamous Ministry for State Security (Stasi), and introduced a Marxist-Leninist curriculum in the schools. State investment focused on creating heavy industry at the expense of consumer goods, while collectivization was the goal in agriculture. In addition, the East German government continued to make reparations payments to the Soviet Union in the form of goods and capital stock. Poor economic conditions combined with an increasingly totalitarian political structure caused many East Germans to flee the country. The East German government closed its border with the West in May 1952, but the exodus continued, as Berlin remained an open city. On average, more than 175,000 people per year left East Germany for West Germany between 1949 and 1953.

Open rebellion against the SED regime, however, did not coalesce until June 1953. The failure of the government to rescind an increase in the expected levels of production—in line with Soviet policy since the death of Josef Stalin in March 1953—spurred mass strikes in Berlin. Demonstrations in the capital on 16 June 1953 spread to the rest of the country the following day, until the Soviet Army sent tanks to quell the disturbances. Ironically, the uprising strengthened Ulbricht's position, as the Soviets were now clearly committed to supporting his regime.

Ulbricht nonetheless instituted limited reforms aimed at placating East Germans. The SED dropped its Five-Year Plan and adopted a more balanced Seven-Year model, collectivization was temporarily abandoned, and the centralized economy shifted its focus to providing more housing and basic consumer goods. Without fundamental reforms, however, the East German economy continued to lag far behind that of West Germany. Ulbricht's solution to this slow growth was to increase the tempo of socialization in the late 1950s, resuming collectivization and pressing business owners into cooperatives. The regime also stepped up its communist indoctrination efforts. East German youths were pressed to join the police and armed forces (East Germany had become part of the Warsaw Treaty Organization in 1955) to demonstrate their commitment to socialism. In the meantime, the flow of refugees moving through Berlin from East to West accelerated.

The solution to this problem, proposed by Ulbricht and approved by Soviet leader Nikita Khrushchev, was to close the border in Berlin as well. On the night of 12–13 August 1961, East German police units began constructing the Berlin Wall. Labeled an antifascist bulwark by the SED regime, the wall's construction was seen in the West as an admission of defeat. It served its purpose, however. Not only did it stop the drain of talent and manpower, but it also allowed the East German government room to experiment with reforms.

On the very night that the Berlin Wall went up, Ulbricht initiated a program of de-Stalinization, changing the names of streets, squares, buildings, and factories. By 1963, the regime was comfortable enough to announce the New Economic System (NES). Aimed at improving productivity and making management more responsible, the NES was a limited market-oriented system that brought a short-term surge in growth. In the long run, however, the SED was unwilling to surrender enough control over the economy to make the system work. The NES was abandoned in 1970.

Curiously, in 1968 the SED had promulgated a new constitution that not only cemented the party's leading role in politics but also declared East Germany a socialist state, bringing the construction phase to a close. East Germany, however, could hardly be considered successful. The economy was stagnant, and East Germans continued to seek refuge in the West whenever they could. Pressure from the West, in the form of the Hallstein Doctrine, left the state isolated beyond the Soviet bloc.

Ulbricht, aging and increasingly out of touch, was quietly pushed aside in favor of Erich Honecker, formerly head of the communist youth organizations, in 1971. In Cold War terms, West German politics had shifted decisively as well, as the SPD came to power in 1969. As part of an initiative known as Ostpolitik, Willy Brandt, the new chancellor of West Germany, favored opening relations with East Germany. Honecker spoke of "no taboos," indicating a willingness to open East German society and culture, if not East German politics and the Berlin Wall.

The increased flexibility on both sides paid handsome dividends. Brandt opened his initiative with a visit to East Germany in May 1970 to discuss intra-German relations. Progress was limited, however, as Ulbricht insisted on linking other issues to the question of West Berlin's status. Under Honecker, representatives of West Germany and East Germany managed to work out new agreements on transit and tourism (part of the four-power Berlin accord of 1971) relatively quickly. On 8 November 1972, after only six months of negotiations, the two states concluded a Basic Treaty that established relatively normal relations between them. While the two Germanies stopped short of full-scale recognition, the Basic Treaty acknowledged the reality of two states.

This was a major triumph for East Germany, as its diplomatic isolation came to an end. Trade with the West grew substantially, and increasing visits from West Germans provided a steady source of hard currency. To a considerable degree, the West underwrote the refurbishment of the East German infrastructure. This allowed Honecker to implement social programs on a grand scale. Between 1971 and 1980, the regime built more than a million new housing units and renovated half a million more. Economic policy centered on the provision of consumer goods, and the East German standard of living, although still lower than West Germany's, was the highest in the Soviet bloc.

Under Honecker, moreover, the SED regime scaled back indoctrination campaigns, accepting public conformity as being sufficient. Most East Germans went along with the bargain, supporting—or at least not opposing—the SED in public and otherwise retreating into their private lives. Those who continued to criticize the regime openly, such as Wolf Biermann and Vera Wollenberger, usually found themselves "exiled" to the West. The Stasi established an extensive network of spies and informants that effectively quashed any nonconformist movements before they could start.

Honecker's no-taboos state thus evolved into a stagnant society—a "niche society" as Günter Gaus famously termed it—in which stability and outward conformity were most important. The politics of the East German state were nonetheless hollow. Although the SED professed confidence in its support from the population, it consistently refused to allow citizens below retirement age to travel to the West. Supported financially by West Germany and politically by the Soviet Union, however, East Germany played an increasingly important role in Cold War and international politics. In the early 1980s, the Soviet Union and the United States came to loggerheads over the deployment of nuclear missiles on German territory. Although Honecker accepted the missiles, he acted as a moderating force in the standoff. He insisted that gains in West German–East German relations would lead to a solution favorable to the Soviets and that the entente therefore needed to be preserved.

The Soviets effectively turned the tables under Soviet President Mikhail Gorbachev. When Honecker steadfastly refused to go along with Gorbachev's radical program for reforming socialism internally (perestroika), the Soviet leader made it clear that support for East Germany would be limited. This along with Honecker's continuing liberalization of intra-German relations—allowing independent political demonstrations in 1987, for example, or televising debates between East and West German politicians—ultimately led to the collapse of the East German state.

When the Hungarian government removed the fortifications along its border with Austria in May 1989, more than 30,000 East Germans fled along this route in just six months. Honecker refused to acknowledge the mass exodus, and during a visit to East Germany on 7 October 1989, Gorbachev made it clear that the Soviet Union would not intervene as it had in 1953. Two days later, demonstrations against the SED regime began in Leipzig.

Reformers within the SED, led by Egon Krenz, seized the opportunity to oust Honecker at the party plenum on 18 October 1989. On 9 November they announced that citizens of East Germany would be allowed to travel freely. Within days, millions of East Germans had broken through the Berlin Wall, literally in many cases, to visit West Germany. Further attempts at reform by the Krenz government paled against the economic lure of the West, however. On 18 March 1990, East Germans voted overwhelmingly for unity with West Germany. State treaties for the economic (1 July 1990) and political (3 October 1990) union of the two Germanies soon followed. The German Democratic Republic, one of the central players in the Cold War in Europe, had ceased to exist.